* Production in 2014 set to rise by at least 500,000 bpd
* Big gains from southern Majnoon, Garraf, Halfaya
* Output this year to average around 3 million bpd
By Peg Mackey
BAGHDAD, Oct 23 (Reuters) - Iraq, OPEC's second biggest oilproducer, expects a robust return to growth next year as foreigncompanies at work in its southern oilfields push output towardsthe highest level ever, a senior Iraqi oil official said onWednesday.
Thamir Ghadhban, chairman of the advisory commission toIraq's Council of Ministers, said flows are set to rise by atleast 500,000 barrels per day (bpd) to an average 3.5 millionbpd - as Majnoon - run by Royal Dutch Shell, Garraf -led by Malaysia's Petronas - and Halfaya, operated by PetroChina, ramp up.
Farther north, the Badra oilfield, run by Russia's GazpromNeft, the oil arm of Gazprom, is also set to come online.
"We expect a significant rise in production next year," saidthe senior oil technocrat.
"And if we have an increment of 500,000 barrels a daysustained over 2014, with the same level of oil price (above$100 a barrel) it will be positive compared with this year."
Production this year is likely to average more than 3million bpd, a touch up on 2012, but by the end of the yearrates are likely to reach a level of 3.5 million bpd, said theformer oil minister.
After flatlining for decades due to wars and sanctions,Iraq's output began to expand in 2010 after it secured servicecontracts with oil titans such as BP, Shell, Eni and Exxon Mobil.
Since then, output has risen by 600,000 bpd to 3 million bpdcourtesy of higher flows from the core oilfields of Rumaila-operated by BP, West Qurna-1 - run by Exxon - and Zubair, whereEni is leading development.
These vital southern oilfields, along with Majnoon and WestQurna-2 - led by Russia's Lukoil - are the main drivers ofBaghdad's oil expansion.
The swift increases have helped cushion oil markets fromprice swings after shipments from neighbour Iran were halved dueto Western sanctions and output from exporters such as Libya andSudan proved unstable.
But Iraq's production revival has slowed this year due toinfrastructure and security problems on top of an ongoing rowbetween Baghdad and autonomous Kurdistan, keeping output farbelow projected targets.
The obstacles led Iraq to backtrack on an initial 2013target of 3.7 million bpd, which - with projected growth of700,000 bpd - unnerved regional rivals, including OPECheavyweight Saudi Arabia. The Kurdistan Regional Government(KRG) was due to contribute 250,000 bpd.
"If you take all this together: losses in the south, lossesdue to sabotage on the export pipeline, plus the KRG'snon-fulfillment of its obligation, you can see why the plannedproduction and export levels for 2013 were not reached," saidthe Iraqi oil official.
Oil is at the heart of a dispute between the federalgovernment and Iraqi Kurdistan over control of oilfields,territory and crude revenues.
Baghdad says it has the sole right to explore, develop andmarket the country's oil with regional participation inaccordance with the constitution.
Sales of oil produced in Iraq's Kurdish region via thefederal pipeline system have been blocked in the dispute.
Kurdistan has since been making strides towards energyindependence and is due to start up its own pipeline via Turkeyby the end of the year, in defiance of Baghdad.
"The federal government is opposed to this. They havedeclared it officially and they have conveyed their oppositionto the Turkish government officially," said the Iraqi oilofficial.
Iraq has provided the world oil market with crucialsupplies, giving consumers another option besides Saudi Arabiaas the main alternative exporter.
Exports have been running at 2.4 million bpd this year, butfell to 2 million bpd last month, the lowest in 19 months.Repairs and expansion work at the strategic Basra Oil Terminalcut shipments of Basra Light crude, which accounts for most ofBaghdad's export revenue.
"This is now over and exports are picking up," saidGhadhban. When completed by mid-2014, the port expansion willprovide Iraq with offshore export capacity of 4 million bpd.
And if myriad infrastructure and political hurdles were tobe removed, Ghadhban said output next year could soar towards 4million bpd - overtaking Iraq's all-time high of 3.8 million,hit in 1979. But this is unlikely, said the Iraqi oil official.
"Four million would be a challenging target - a sustainedaverage over the year of 3.5 million would be more realistic,"he said.
It would also provide ample oil revenue, which accounts forthe lion's share of Iraq's government revenues and foreignexchange earnings.
Production of nearly 3 million bpd earned Baghdad $94billion in 2012 and netted $61 billion in the first eight monthsof this year.
"There is so much pressure on the government to provide morerevenue to improve the standard of living and for services -especially in the energy and security sectors," said Ghadhban.